Evaluation of Option Investment Based on Black-Scholes Model

Abstract

Caused by the bursting of the U.S. housing and credit bubbles, the global financial crisis starting in 2008 has been widely considered as the most difficult financial episode in the past eighty years. The principal objective of this study is to investigate the financial market during financial crisis and thus providing suggestions for the investment of a particular option. S&P 500 index has being well recognized as the bellwether for U.S. financial market and its options throughout the period from 2007-1-1 to 2009-12-31 were selected for investigation. The whole study fell into three main stages. During the first stage, I verified the validation of a commonly used derivative investment instrument--Black-Scholes Model, whose developers were rewarded the 1997 Nobel Prize in Economics for their great contribution in modelling option pricing. The second stage was the classification of various options based on the Black-Scholes Model by using K-Means Clustering approach. A java program was written in the third stage for the purpose of analysing an option specified by user and giving some useful recommendations.